Securities class action lawsuits involving tech companies increased for the fourth consecutive year in 2019, according to the latest report from Cornerstone Research. The report, examining securities litigation activity against tech companies, supplements Cornerstone Research’s previously released report on 2019 securities litigation filing activity generally. The most recent report, which is entitled “Tech Company Securities Class Action Lawsuit Filings and Settlements: 2015 – Q1 2020 Review and Analysis,” and which examines securities filings and settlements related to tech companies between 2015 and Q1 2020, can be found here. Cornerstone Research’s August 20, 2020 press release about the report can be found here.
The phrase “tech companies” as used in the report refers to five subsectors under the Bloomberg Industry Classification System, including (1) computers; (2) internet; (3) semiconductors; (4) software; and (5) telecommunications. The report examines securities class action filing data between 2015 and the first quarter of 2020, and settlement data for the period 2015 through 2019.
According to the report, total tech company filings increased steadily during the four year period 2016 through 2019, from 28 filings in 2016 to a record high number of filings against tech companies of 85 in 2019. The 85 tech company filings in 2019 represents an increase of 55 percent over the 55 filings in 2018. Flings against tech companies accounted for 20 percent of total number of all filings during the period 2016 to 2019.
These filing figures include filings in both federal and state court. Tech company filings in federal court increased 44 percent from 2018 to 2019 (that is, from 45 filings in 2018 to 65 filings in 2019). The number of ’33 Act filings against tech companies in state court doubled, from ten in 2018 to 20 in 2019. State court filings against tech companies increased as a percentage of all tech company filings, from nine percent of all tech company filings in 2017, to 33 percent in 2019. This shift in tech company filings from federal court to state court “is likely a consequence of the U.S. Supreme Court’s 2018 ruling [in the Cyan case] that confirmed state courts’ jurisdiction over 1933 Act claims.”
Within the overall filings against tech companies, the Internet and Software industry subsectors accounted for 66 percent of tech company filings in 2019.
Securities suit filings against tech companies slowed in the first quarter of 2020. There were only a total of 12 tech company filings in the year’s first quarter, eight in federal court and four in state court. The first quarter slowdown is “likely due to slowdowns associated with the pandemic.” The report notes that while the full impact of the pandemic on filing activity remains to be seen, “there is potential for increased securities class action filings, including against tech companies, based on the economic slowdown and operational issues associated with the pandemic.”
The 2019 securities class action lawsuits against tech companies involved large amounts of market capitalization losses, compared to prior years, whether viewed as disclosure dollar loss or maximum dollar loss.
Disclosure dollar loss (DDL) measures the change in value in the defendant company’s market cap between the trading day immediately before the end of the class period and the trading day immediately after the end of the class period. The DDL Index of tech company filings rose to $161 billion in 2019 from $127 billion in 2018, representing a 27 percent increase. The median DDL of tech company filings rose to $337 million in 2019 from $199 million in 2018, representing a 69 percent increase.
Maximum dollar loss (MDL) measures the change in the defendant company’s market capitalization from the trading day with the market cap high to the trading day immediately after the end of the class period. The MDL index of tech company filings more than doubled in 2019 to $614 billion, compared to $282 billion in 2018. The median MDL for tech company filings rose in 2018 to $1.4 billion, nearly three times the 2018 amount of $500 million.
In 2019, the number of tech company settlements declined 67 percent compared to the year prior, from 21 tech company settlements in 2018 to seven tech company settlements in 2019. The number of non-tech company settlements increased from 54 in 2018 to 63 in 2019. The seven tech company settlements in 2019 was the lowest number of tech company settlements in the last five years. By contrast, the 21 tech company settlements in 2018 represented the highest annual number of tech company settlements during the five year period 2015-2019.
Tech company settlements generally have been smaller and reach more quickly than those for non-tech companies. At the same time, however, for both tech companies and non-tech companies, cases with larger settlement amounts tend to take longer to settle.
In 2019, the median tech company settlement ($17 million) was larger than the median non-tech company settlement ($11 million), reversing the trend from 2015 to 2018, when median tech company settlements generally were smaller than median non-tech company settlements. For example, in 2018, the median tech company settlement was $9.5 million, while the median non-tech company settlement was $13 million.
Cornerstone Research’s previously released report on securities class action lawsuit filing activity generally, including both tech companies and non-tech companies, during the first half of 2020 can be found here.